What are the funds you are invested in within your American funds Roth IRAs? American funds has some of the worst expense ratios in the business.
...One way to double check is to use a 2016 version of the case study spreadsheet (see attachment in https://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/msg1467418/#msg1467418) and match the federal tax shown on your 2016 Form 1040.
I feel like I'm forgetting something!
...One way to double check is to use a 2016 version of the case study spreadsheet (see attachment in https://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/msg1467418/#msg1467418) and match the federal tax shown on your 2016 Form 1040.
I feel like I'm forgetting something!
Unless you have an unusual situation, you should be able to match (say, within ~$10) the spreadsheet and 1040 results. If you can do so, that should provide confidence in entries for 2017.
If the final numbers don't match, check intermediate numbers (e.g., AGI) to see where things deviate. Ask questions here as needed. Good luck!
I have done the spreadsheet and it's pretty close. I'm not sure what to put in the "other tax advantaged investments" section..is that how much we put in a month into the Roth IRA, Roth 401 K, etc) or what they are worth now? It looks like this and is just above the total expenses line:Yes, those are "how much [you] put in a month into the Roth IRA, Roth 401 K, etc."
Other tax-advantaged investments:
Roth IRA
Roth 401k/403b
529 plan/ other college
OR does that monthly amount go up more towards the top of the spreadsheet under the income categories section that looks like this:Similar but not the same. There is a difference between 401k vs. Roth 401k, IRA vs. Roth IRA, etc. Does that help?
Traditional IRA
401(k) / 403(b) / TSP / etc.
457 plans
Personal HSA
...
ESPP/After-tax 401k
Pension contribution
Life/LTD Insurance
...
Basically these to sections kinda confused me because it looks like its asking the same thing twice
Then again under the Summary section it has an "IRA+401K/403 b...etc" What do I put there?For the most part, you don't need to (and shouldn't) enter anything except in a cell with a green background. The summary section is calculated for you, based on entries above.
Also under the TIME to FI, the first line is "extra income after RE" I'm not sure what to include here. There is a pension that we'll get someday but not if we try to retire in 5 years. Also SS...someday...do I include those anyways? that money doesn't help me in the beginningYes, this is for guaranteed income other than what you will receive from your investments. Pensions and SS are examples. Your point that these amounts won't start immediately upon retirement is a good one, and an excellent example of why this is a simplified evaluation of "how long to Financial Independence?".
Under Current Savings on the "taxable" line item, would you include real estate equity, money market monies?I'd include anything I expect to provide the "Real, after tax, return on taxable investments" you put for that cell (4 rows above the taxable line item). E.g., unless you use ~0% I would not include money market funds. Real estate is very location-dependent.
Tax deferred includes our balances in the 401K, then last line is our American funds roth balances?Yes.
How did you decide to invest in all Roth accounts? In the 25% bracket, I would think about putting money into traditional accounts to try to cut down on your tax bill. Maybe max out the traditional 401k and Roth IRAs. You'd cut $4500/year from your federal tax by doing it that way.+1
To be clear, any Roth 401k balance goes on the Roth line, while any "normal" (aka traditional) 401k balance goes under tax deferred.QuoteTax deferred includes our balances in the 401K, then last line is our American funds roth balances?Yes.
How did you decide to invest in all Roth accounts? In the 25% bracket, I would think about putting money into traditional accounts to try to cut down on your tax bill. Maybe max out the traditional 401k and Roth IRAs. You'd cut $4500/year from your federal tax by doing it that way.
If you call Vanguard they will walk you through exactly what you need to do, with maybe a 15 minute phone call. Otherwise Fidelity and Schwab both have very low fees as well.
Husband maxes out a Roth 401K through his job and we both have separate Roth Ira's through Am funds...so now we move onto taxable accts? or would you rec traditional Ira?Main question is "why Roth 401k instead of traditional 401k?"
You need to figure out where the dividend is coming from. IRAs don't appear on your 1040 as dividends.
this is my dilemma..trying to figure out where to get the income stream from without paying a bunch of tax/penalty. I'm still in the learning phase because it has never dawned on me that we didn't have to work until we are over 60!See How to withdraw funds from your IRA and 401k without penalty before age 59.5 (https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/) for some thoughts.
Do you have a taxable account at American funds? Because if this is in your Roth, you should not have that on your 1040 so you may have been overtaxed.You need to figure out where the dividend is coming from. IRAs don't appear on your 1040 as dividends.
I scoured the tax return again and found it:
1099 Div from Am funds as follows: New economy fund 23.05, American funds growth portfolio at 59.36 then and the spouse's job share retention of 26.80
Does this help? Clearly it isn't enough to count on for those early retirement years before SS,pension, and ira $$ kicks in! this is my dilemma..trying to figure out where to get the income stream from without paying a bunch of tax/penalty. I'm still in the learning phase because it has never dawned on me that we didn't have to work until we are over 60! My mind is blown and I'm racing to figure it out and make it happen! :) Thanks!
Do you have a taxable account at American funds? Because if this is in your Roth, you should not have that on your 1040 so you may have been overtaxed.You need to figure out where the dividend is coming from. IRAs don't appear on your 1040 as dividends.
I scoured the tax return again and found it:
1099 Div from Am funds as follows: New economy fund 23.05, American funds growth portfolio at 59.36 then and the spouse's job share retention of 26.80
Does this help? Clearly it isn't enough to count on for those early retirement years before SS,pension, and ira $$ kicks in! this is my dilemma..trying to figure out where to get the income stream from without paying a bunch of tax/penalty. I'm still in the learning phase because it has never dawned on me that we didn't have to work until we are over 60! My mind is blown and I'm racing to figure it out and make it happen! :) Thanks!
And honestly I have no idea what the job share retention is? Does he have stock from his employer?
Husband maxes out a Roth 401K through his job and we both have separate Roth Ira's through Am funds...so now we move onto taxable accts? or would you rec traditional Ira?Main question is "why Roth 401k instead of traditional 401k?"
We can deal with t vs. R IRAs after that - if you can deduct tIRA contributions (http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits) at all.
See Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) for general suggestions and links in there specific to the traditional vs. Roth choice.
...have the hubs move the Roth 401 back to a traditional and continue to max it out, as well as max out the roth ira's for both of us. then beyond that, open a vanguard taxable index fund account and put as much as possible there too.Sure looks to be a fine plan.
Is it to late on the 401k, meaning would we have time to build it up to convert, if we think we want to try to RE in the next 5 years?The less you have now in traditional accounts and guaranteed (e.g., pension, SS, net rental) income, the more likely traditional contributions will be good for you.
Does our situation even look doable in your opinion? Thanks!Don't know about others, but it would help me a lot if you copied and pasted cells G1:G226 from the 'Posting' tab of the spreadsheet into a post here. That is, after you have the 'Calculations' tab to your liking.
...have the hubs move the Roth 401 back to a traditional and continue to max it out, as well as max out the roth ira's for both of us. then beyond that, open a vanguard taxable index fund account and put as much as possible there too.Sure looks to be a fine plan.QuoteIs it to late on the 401k, meaning would we have time to build it up to convert, if we think we want to try to RE in the next 5 years?The less you have now in traditional accounts and guaranteed (e.g., pension, SS, net rental) income, the more likely traditional contributions will be good for you.QuoteDoes our situation even look doable in your opinion? Thanks!Don't know about others, but it would help me a lot if you copied and pasted cells G1:G226 from the 'Posting' tab of the spreadsheet into a post here. That is, after you have the 'Calculations' tab to your liking.
The G column on mine doesn't look helpful, for ex: here's G1-
Category Monthly CommentsAnnual
Not sure what happened!
The G column on mine doesn't look helpful, for ex: here's G1-At the very least you must have added the [/table] (without the nobbc tags I used for display) at the end, correct?
Category Monthly CommentsAnnual
Not sure what happened!
Category | Monthly | Comments | Annual |
Salary/Wages for earner #1 | $4,000 | Test post | $48,000 |
Pretax Health Ins. | $200 | $2,400 | |
Employer-sponsored HSA | $283 | At maximum | $3,400 |
FICA base salary/wages | $3,517 | $42,200 | |
Traditional IRA | $458 | At maximum | $5,500 |
401(k) / 403(b) / TSP / etc. | $1,500 | At maximum | $18,000 |
Subtotal 1 | $1,558 | $18,700 | |
Federal Total Income (for IRS tax) | $1,558 | $18,700 | |
Federal tax | $36 | 2017 rates, S, stand. ded., 1 exempt. | $430 |
State/City tax | $0 | Guess, using 0.00% * (AGI - Exempt'n) | $0 |
Soc. Sec. tax | $218 | Assumes 1 earner paying | $2,616 |
Medicare tax | $51 | $612 | |
Total income taxes | $305 | $3,658 | |
Income before other expenses | $1,253 | $15,042 | |
Monthly Average Expenses: | |||
Rent | $750 | $9,000 | |
Groceries | $300 | $3,600 | |
Miscellaneous | $200 | $2,400 | |
Non-mortgage total | $1,250 | $15,000 | |
Total Expense | $1,250 | $15,000 | |
Total to invest | $3 | $42 | |
Summary: | |||
"Gross" income | $4,000 | $48,000 | |
Income taxes | $305 | $3,658 | |
After-tax income | $3,695 | $44,342 | |
IRA+401k/403b/TSP/457 | $1,958 | $23,500 | |
HSA | $283 | $3,400 | |
Living expenses | $1,450 | $17,400 | |
After-tax investable | $3 | $42 | |
Time to FI?: | |||
Time to FIRE | 9.9 | years | |
Safe Withdrawal Rate | 4.00% | percent | |
Real return on tax-deferred investments | 5.00% | percent | |
Real, after tax, return on taxable investments | 4.25% | percent | |
Current Savings | |||
Projected Savings at Retirement | |||
Taxable | $500 | ||
Tax-deferred (e.g. trad. IRA/401k) | $291,854 | ||
Roth + HSA | $42,226 | ||
Total projected stash | $334,580 | ||
Projected Expenses in Retirement | |||
Non-loan, non-work expenses | $15,000 | ||
Annual non-tax retirement expense | $15,000 | ||
Income taxes | $272 | ||
Total | $15,272 | ||
Stash needed for retirement @4.0% SWR | $381,810 | ||
Need $47,230 more. |
Filing Status | 1 | 1=S, 2=MFJ, 3=HOH | |
# Exemptions | 1 | ||
Adult #1 | |||
Age | 35 | ||
# of earners | 1 | ||
Total Income | $18,700 | ||
Std. Deduct. | $6,350 | ||
Act. Deduct. | $6,350 | ||
Exemption | $4,050 | ||
AGI | $18,700 | ||
MAGI | $24,200 | ||
Taxable | $8,300 | ||
1040 Tax | $830 | ||
Saver's credit | $400 | ||
Tax after n-r credit | $430 | ||
Net Tax | $430 | ||
Monthly | $36 | ||
Item. Deduct. | $0 | ||
Version | V9.1 |
Ok, I don't know how to make it pretty like your example, but here's the best I could do and my numbers are the best I can do.Copying cells G1:G226 from the 'Posting' tab of the spreadsheet and pasting into a post here should work, but your numbers are very legible so on to them.
Rental income $3,100 $37,200Ok, "understanding why there is a difference, and changing the spreadsheet inputs so the difference in the calculated AGI and federal tax is less than $100" is your homework assignment. Rental info should come from Schedule E, and getting the rental cash flow correct might fix the AGI also.
Rental real expenses $1,700 deduct from rents to cover T&I $20,400
Rental depreciation expense $0 not sure what to put here/I've Em'd tax acct $0
Rental taxable income $1,400 our taxes show us at a loss, not income $16,800
...
Federal Total Income (for IRS tax) $13,073.00 $156,876 nope, 1040 shows 123K grosslast yr
Bradley LN $955 Not sure where to put rental mtg so put it here $11,460If the spreadsheet was very sophisticated, it might handle rental mortgage loans exactly. But it's not that sophisticated, so the mortgage interest (and taxes and insurance) goes under your rental real expenses. There really isn't a great slot for rental mortgage principal at this point - never noticed that and nobody else (IIRC) ever mentioned it. For now, just consider whatever you are paying for rental mortgage principal as part of the amount "Available for taxable investment."
Income taxes (this is about a 20% bracket?) $3,033 tax return states 25% taxes $36,399See Marginal Vs Effective Tax Rates And When To Use Each (https://www.kitces.com/blog/understanding-marginal-tax-rate-vs-effective-tax-rate-and-when-to-use-each/). The 20% you calculated might be an effective rate, but that is irrelevant for something like a traditional vs. Roth choice. Your marginal rate (which may be the same as your tax bracket, but not necessarily) is relevant for your financial choices.
Change in spending after RE $0 is this an amount I think we'll spend?It is the change from the amount you are spending now (as entered in all the spending categories) to what you expect to spend after retirement. Positive number if you expect to spend more, negative number if you expect to spend less.
Ok, I don't know how to make it pretty like your example, but here's the best I could do and my numbers are the best I can do.Copying cells G1:G226 from the 'Posting' tab of the spreadsheet and pasting into a post here should work, but your numbers are very legible so on to them.QuoteRental income $3,100 $37,200Ok, "understanding why there is a difference, and changing the spreadsheet inputs so the difference in the calculated AGI and federal tax is less than $100" is your homework assignment. Rental info should come from Schedule E, and getting the rental cash flow correct might fix the AGI also.
Rental real expenses $1,700 deduct from rents to cover T&I $20,400
Rental depreciation expense $0 not sure what to put here/I've Em'd tax acct $0
Rental taxable income $1,400 our taxes show us at a loss, not income $16,800
...
Federal Total Income (for IRS tax) $13,073.00 $156,876 nope, 1040 shows 123K grosslast yr
Some of the changes will be dependent on overtime, but as of may 2017, this is how it calculated it out for the year..i suppose it would be nice if that ends up being our year end!
If I use the schedule E, it's only for last year and one of the houses wasn't rented the whole year so it will be quite different this year. I entered the total amount of rents we get per month as if the houses will be rented for an entire year, as will be the case this year so that total amt is 3100/mo. I'm just not sure how to account for these differences in the spreadsheet as I don't have a complete schedule E for this scenario. Furthermore, how is it important to the overall goal of determining an FI possibility? I know that is probably a stupid question...Overall, it feels like to many variables. I didn't put the heloc (35K) on here that we have on the one rent house that is paid off, so T&I get paid in one lump sum annually. That is where part of the 1700 amount in rental expenses come from, this is the amount I hold out each mo to cover T&I on the house that is pd for and other incidentals. In reality, I don't hold out that much, some of it just comes from our income so I was trying to be generous (worst case scenario) on expenses. I wish I knew someone local that was really good at the micro planning of this whole FI idea so I can discuss different options as it seems we have a few different irons in the fire that could be considered. Again, I appreciate you taking the time to help me review!QuoteBradley LN $955 Not sure where to put rental mtg so put it here $11,460If the spreadsheet was very sophisticated, it might handle rental mortgage loans exactly. But it's not that sophisticated, so the mortgage interest (and taxes and insurance) goes under your rental real expenses. There really isn't a great slot for rental mortgage principal at this point - never noticed that and nobody else (IIRC) ever mentioned it. For now, just consider whatever you are paying for rental mortgage principal as part of the amount "Available for taxable investment."
Ok, I added the principle that I pay on the rent house to this line, which is only about 175$, but in addition, we pay extra ~400 to principle out of the rents that get paid, I put that amount in the "additional loan payments". Part of the 1700 that I listed in the rental real expenses column would capture the mortgage interest. Tax and Ins is covered in the escrowed payment of 955 so I didn't separate that out. However, when I jot this out on paper I do include T&I on ALL properties and divide by 12 as part of our monthly expenses in the event we FIRE. I'm still old school to some extent and use good ole paper and pencil with a calculator. In my attempt to be as thorough as possible, I'm using spreadsheets to try to capture on things I may not think of on my own, such as tax rates, etc. This is totally where I start to get lost. Also, the different scenarios, so I'm trying to be as thorough as possible with all my different options. It is certainly nice to have a sounding board.QuoteIncome taxes (this is about a 20% bracket?) $3,033 tax return states 25% taxes $36,399See Marginal Vs Effective Tax Rates And When To Use Each (https://www.kitces.com/blog/understanding-marginal-tax-rate-vs-effective-tax-rate-and-when-to-use-each/). The 20% you calculated might be an effective rate, but that is irrelevant for something like a traditional vs. Roth choice. Your marginal rate (which may be the same as your tax bracket, but not necessarily) is relevant for your financial choices.
I was just reading up a bit on marginal tax rates...totally lost me so I'll need to email my tax lady for further clarification....Basically, this whole sentence your wrote has me in the corner with my tail between my legs. LOL I don't feel smart enough! I'll have to read and re read and re read before it starts to sink in.QuoteChange in spending after RE $0 is this an amount I think we'll spend?It is the change from the amount you are spending now (as entered in all the spending categories) to what you expect to spend after retirement. Positive number if you expect to spend more, negative number if you expect to spend less.
If I use the schedule E, it's only for last year and one of the houses wasn't rented the whole year so it will be quite different this year.Understood.
If I use the schedule E, it's only for last year and one of the houses wasn't rented the whole year so it will be quite different this year.Understood.
It would probably help you to use a 2016 version of the case study spreadsheet (see attachment in https://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/msg1467418/#msg1467418), with which you should (unless I'm missing something - always possible) be able to match the federal tax (and AGI, etc.) shown on your 2016 Form 1040.
Ok, I'll look. Can you please help me understand why getting this so exact is the key to helping me understand our FI possibilities? Sorry if this is a stupid question.
Once you understand that, you can use the 2017 version and more confidently make budget estimates and see the results.
Ok, I'll look. Can you please help me understand why getting this so exact is the key to helping me understand our FI possibilities? Sorry if this is a stupid question.You are correct that exactness is not critical, because any FI projection relies on estimates of many things (future return on investment for one) not known precisely.
Ok, I'll look. Can you please help me understand why getting this so exact is the key to helping me understand our FI possibilities? Sorry if this is a stupid question.You are correct that exactness is not critical, because any FI projection relies on estimates of many things (future return on investment for one) not known precisely.
It's more an inference from your posts that some things (e.g., your rental cash flow and tax effects) are unclear to you, and figuring those out will help you make better decisions in the long run.
The math behind personal finance is much simpler than many financial advisors imply. If you understand exponents, e.g., "n" in (1+i)^n, then your math skills are likely good enough to clarify taxes, FI projections, etc. Some of the language makes things seem complex, but if you take a little time to work through examples it's likely you will have success.
Using your 2016 numbers should be helpful because (unless the tax preparer made a mistake) you have a worked example with the correct answer, to which you can compare your work.
I have done the spreadsheet and it's pretty close. I'm not sure what to put in the "other tax advantaged investments" section..is that how much we put in a month into the Roth IRA, Roth 401 K, etc) or what they are worth now? It looks like this and is just above the total expenses line:Yes, those are "how much [you] put in a month into the Roth IRA, Roth 401 K, etc."
Other tax-advantaged investments:
Roth IRA
Roth 401k/403b
529 plan/ other collegeQuoteOR does that monthly amount go up more towards the top of the spreadsheet under the income categories section that looks like this:Similar but not the same. There is a difference between 401k vs. Roth 401k, IRA vs. Roth IRA, etc. Does that help?
Traditional IRA
401(k) / 403(b) / TSP / etc.
457 plans
Personal HSA
...
ESPP/After-tax 401k
Pension contribution
Life/LTD Insurance
...
Basically these to sections kinda confused me because it looks like its asking the same thing twiceQuoteThen again under the Summary section it has an "IRA+401K/403 b...etc" What do I put there?For the most part, you don't need to (and shouldn't) enter anything except in a cell with a green background. The summary section is calculated for you, based on entries above.QuoteAlso under the TIME to FI, the first line is "extra income after RE" I'm not sure what to include here. There is a pension that we'll get someday but not if we try to retire in 5 years. Also SS...someday...do I include those anyways? that money doesn't help me in the beginningYes, this is for guaranteed income other than what you will receive from your investments. Pensions and SS are examples. Your point that these amounts won't start immediately upon retirement is a good one, and an excellent example of why this is a simplified evaluation of "how long to Financial Independence?".
There are more complex tools, such as described in Best and/or Recommended Retirement Calculator - Bogleheads.org (https://www.bogleheads.org/forum/viewtopic.php?t=115839#p1686175). Any tool is at best as good as the inputs used, so take all answers with some skepticism (unless you know for sure what the markets will do throughout the future).QuoteUnder Current Savings on the "taxable" line item, would you include real estate equity, money market monies?I'd include anything I expect to provide the "Real, after tax, return on taxable investments" you put for that cell (4 rows above the taxable line item). E.g., unless you use ~0% I would not include money market funds. Real estate is very location-dependent.
MDM, I have another stupid question...give an example of "real, after tax, return on taxable investments"
Thanks!!QuoteTax deferred includes our balances in the 401K, then last line is our American funds roth balances?Yes.
...give an example of "real, after tax, return on taxable investments"4.25%
...as a first-order (i.e. linear) approximation,
real = nominal − inflation